Things are looking up in the Japanese economy at last, but the rate of progress is still modest, according to a recent analysis by The Conference Board. Japan got a big boost from a surge in exports of industrial equipment to China between 2002 and 2004, but "this external stimulus has largely dissipated," says Gail D. Fosler, executive vice president and chief economist of The Conference Board. In a recent newsletter targeting the organization's global business network, she notes that employment and wages in Japan have risen for the first time in a decade. Compared with other industrialized countries, however, the nation's economy remains weak. Roughly a third of Japan's impressive growth rate of last year can be chalked up to factors that aren't likely to be repeated.

Japan suffered through recession in the 1990s, culminating in the Asian financial crisis of 1997-98. It was also hit hard by the U.S. high-tech collapse and 2001 recession. Since 2002, Fosler says, the country has enjoyed its longest period of growth in 15 years. But it's still subject to the ups and downs of the U.S. economy. It is also highly dependent on automotive exports, having greatly increased sales to China over the past few years. Yet China is unlikely to sustain its tremendous growth rates of recent years. Japan's orders for exported machinery and industrial activity have been flat, as have profits and productivity growth. Therefore, says Fosler, "much of the optimism about Japanese economic growth may be a delayed reaction to the better-than-expected performance of 2004-2005, rather than a hard-nosed appraisal of the future." It's too early to tell whether Japan has entered a period of sustained economic growth, Fosler says, and a recent dip in Japanese stock prices suggests the contrary.